Does the oil from the Gulf of Mexico belong to America?

May 25, 2010

I was thinking about crude oil being a fungible commodity and I realized that I had a fundamental misunderstanding about debate of “to drill, or not to drill” in the Gulf. Prior to this somewhat embarrassing epiphany, my working hypothesis and basis for my position on the issue was that the oil obtained from drilling in the Gulf was obligated to being used in America. The argument that offshore drilling in the Gulf would lead to less dependency on foreign oil seemed an attractive argument.

Unfortunately, what I’ve come to realize is that the fungibility of crude oil means that there is nothing to prevent oil that comes from drilling in “our” Gulf to end up in China or some other foreign country. The leases issued to BP do not stipulate that oil from the Gulf must end up as gasoline for Americans. The bottom line is that BP owns the oil. They are free to sell it on the open market to the highest bidder, and they do. It is capitalism 101.

BP is a corporation and is free to pursue those policies that result in the greatest profits for its shareholders. This is where fungibility makes this not just a hypothesis but a reality in that a barrel of oil from the Gulf is exchangeable with a barrel of oil from Nigeria. To the oil producers and oil traders the origin of that barrel is irrelevant.

All of that seemed to make sense, especially the part that since BP owned the oil they could sell it as they saw fit. It was an unsettling hypothetical but I wondered if there was any evidence if it were actually true. To find out I didn’t need to look any further than the 2009 BP Annual review, http://www.bp.com/annualreview. In the Supplementary Information section on page 29 there are tables showing crude oil production and oil sales broken down by region. From 2007 to 2009, the table reports that crude oil production in the US increased from 513,000 to 665,000 barrels per day. This is an increase of 30%. During the same time period sales of oil to the US decreased from 1,533,000 to 1,426,000 barrels per day representing a 7% decrease. I believe that this must mean that while BP is getting more oil from US sources it is actually selling less oil to the US. Can this be true? Please, someone tell me the flaw in my thinking.

The realization that the oil we obtain from the Gulf does not automatically belong to America really puts the whole “to drill or not to drill” debate in a new light. It’s one thing if increasing Gulf oil production means that we can buy some time to develop alternative energy sources but it’s another thing if it means that BP will increase its profits by selling that oil to China or some other non-US country.

Maybe that’s why some countries such as Saudi Arabia have nationalized oil industries. Now that’s an ugly thought but how else can a government insure that the oil that is obtained from their land stays on their land.

It’s an interesting dilemma for those who believe in free markets, private enterprise and limited governmental interference with business. If we want to keep “our” oil then the government must legislate restrictions on private enterprise. If we believe in small government, free enterprise and limited government regulations then we must accept the fact that the oil that comes from the Gulf is not ours and popular slogans such as “Drill baby, drill” quickly lose their relevance.

[…] from beneath American soil whether it is from the North Slope or from the Gulf of Mexico simply does not belong to America. I just have to repeat that statement because it seems to be a critical point that is not […]